Cost Control and Cost Reduction
Most businesses seek to maximize their profits, which can be accomplished by lowering manufacturing costs. Management employs two effective instruments for this purpose: cost control and cost reduction. Cost control is a technique that provides management with the information they need to determine if real expenses are in line with anticipated costs or not. We employed cost reduction as a way to reduce the product’s unit cost without sacrificing its quality.
Cost control and Cost reduction
Definition of Cost Control
Cost control is a technique in which we use competitive analysis to control the total cost. It is a method of bringing the real cost into line with the defined norms.
It ensures that the total cost of production does not exceed the budgeted amount. Cost control is the result of a series of operations that begins with the creation of a budget for production.
Following that, we assess the real performance. After that, we compute the differences between the actual and budgeted costs, and then we investigate the causes. Finally, we take the steps necessary to correct any discrepancies.
Standard costing and budgetary control are two of the most used cost-management approaches. It is a continuous procedure that aids in the analysis of variance causes. Controlling material waste, for example, or any embezzlement.
- Determination of standards;
- Ascertaining actual results comparing the standards;
- An analysis of the variances;
- Establishing the action that may be taken.
Characteristics of a Good Cost Control System
According to backer and Jacobson, effective cost control should have the following characteristics :
(a) Delineation of centers responsibility, i.e., deciding responsibility centers;
(b) The delegation of prescribed authority;
(c) Various cost standards;
(d) The relevance of controllable cost;
(e) Cost reporting; and
(f) Cost reduction
Definition of Cost Reduction
Cost reduction is a method of lowering the unit cost of a product or service without sacrificing quality. It can be accomplished by the application of new and improved procedures and techniques. It identifies alternative methods for lowering a unit’s production cost.
As a result, cost-cutting ensures lower per-unit costs and more earnings for the company. Cost reduction tries to eliminate superfluous costs that arise during the manufacturing, storage, selling, and distribution of a product. We should concentrate on the following primary factors when looking for cost savings :
- Savings in per-unit production cost.
- The quality of the product should not be affected.
- Savings should be non-volatile in nature.
Quality operation and research, product design improvement, job evaluation and merit rating, and variety reduction are all cost-cutting tools.
Difference Between Cost Control and Cost Reduction
The following are the main differences between Cost Control and Cost Reduction:
- Cost Control focuses on decreasing the total cost of production while cost reduction focuses on decreasing the per-unit cost of a product.
- The process of cost control will be completed when the specified target is achieved. Conversely, the process of cost reduction is a continuous process. It has no visible end. It targets eliminating wasteful expenses
- Cost Control is a temporary process in nature. Unlike Cost Reduction which is a permanent process.
- Cost Control is a preventive function because it ascertains the cost before its occurrence. Cost Reduction is a corrective function.
Cost Control does not guarantee quality maintenance of products. However, cost reduction assured 100% quality maintenance.